ResMed Inc. — Form 10-Q Summary
Business context and reporting period. ResMed develops, manufactures and distributes medical equipment for sleep-disordered breathing and other respiratory disorders. The filing is for the quarter ended March 31, 2012, and reports both the three- and nine-month periods compared with the same periods in 2011. This is fiscal Q3 2012; the request metadata’s “2011 Q3” does not match the filing period. Financial statements are unaudited.
Key financial results
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $349.1 million, up 11% | $996.6 million, up 11% |
| Gross profit / margin | $210.5 million / 60.3%, versus 58.3% | $594.3 million / 59.6%, versus 60.2% |
| Operating income | $76.5 million, versus $64.0 million | $204.7 million, versus $200.2 million |
| Net income | $64.6 million, up 21% | $178.0 million, up 6% |
| Diluted EPS | $0.44, versus $0.34 | $1.18, versus $1.07 |
| Operating cash flow | $286.2 million for nine months, versus $208.9 million |
Amounts are in U.S. dollars. Revenue growth reflected higher unit sales of flow generators, masks and accessories. For the quarter, North and Latin American revenue grew 18%, while international revenue grew 4% as reported and 7% at constant currency. Masks and accessories grew 16% in the quarter; flow generators grew 8%. Nine-month revenue grew 10% at constant currency.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $776.1 million at March 31, 2012, compared with $735.3 million at June 30, 2011. Working capital was reported at $1.1 billion.
- Total debt was $236.0 million, including $235.0 million drawn on the revolving credit facility. The facility’s borrowing limit was amended from $300 million to $400 million; ResMed reported compliance with covenants. The debt bears variable interest rates.
- Of cash, $741.9 million was held by non-U.S. subsidiaries and described as indefinitely invested outside the U.S.; repatriation could require an income-tax provision adjustment.
- Nine-month cash flow from investing was negative $93.5 million, including $53.3 million for acquisitions and $35.1 million for property, plant and equipment. Financing cash flow was negative $130.2 million, including $301.0 million of treasury-stock purchases and net borrowing proceeds of $129.5 million.
- ResMed repurchased 10.8 million shares for $302.2 million during the nine months. At March 31, 11.6 million shares remained authorized for repurchase under the program.
Material changes and management commentary
- Quarterly gross margin improved, primarily from product mix and manufacturing and supply-chain savings, partly offset by lower average selling prices and unfavorable currency movements. Nine-month gross margin declined, chiefly due to currency effects and pricing pressure.
- Quarterly SG&A rose 9% but declined as a share of revenue to 28.9%. R&D increased 22% to $28.4 million for the quarter and 26% to $81.8 million for nine months, reflecting increased personnel and product-development materials and tooling.
- Management cited recent product introductions, including the Stellar ventilation device, S9 VPAP series and Mirage FX mask, and continued investment in R&D and market awareness.
- Acquisitions included BiancaMed, which monitors sleep and breathing, and Gruendler, a medical humidification products business. Aggregate purchase consideration was $64.5 million; the acquisitions were funded with cash. Gruendler’s agreement also allows up to €5.5 million in additional milestone payments.
Outlook, risks and unusual items
- Management expects future SG&A to be 29%–30% of revenue and R&D to remain approximately 8%. The filing provides no specific revenue or earnings guidance and cautions that interim results are not necessarily indicative of full-year results.
- Key exposures include foreign currency, healthcare reform and other regulatory or market changes, competition, execution of growth strategy, and the ability to develop and obtain approval for new products. Currency movements affected reported revenue and margins; ResMed uses options and forward contracts but does not designate them as accounting hedges.
- An unresolved University of Sydney lawsuit concerns a license agreement and intellectual property, including claims that could seek an injunction affecting certain mask products. The company said a loss range cannot be reasonably estimated and did not expect a material adverse financial-statement effect.
- Other items include a $2.1 million gain on remeasurement of a previously held BiancaMed interest, $2.3 million of investment impairments, and a $1.0 million Foundation donation in the quarter. The company reported no material changes to the risk factors in its 2011 Form 10-K and no significant off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the applicable fiscal period: the filing covers the quarter ended March 31, 2012, not Q3 2011.
- Assess whether sales growth, particularly in masks and accessories, and the improved quarterly gross margin are sustainable amid pricing and currency pressures.
- Monitor cash generation, the substantial share repurchases, debt levels and variable-rate exposure, as well as the concentration of cash outside the U.S. and potential tax consequences of repatriation.
- Track the University of Sydney litigation and Gruendler’s potential milestone payments; the filing does not quantify a possible litigation loss.
- Consider that the reported statements are interim and unaudited, and that management’s outlook is limited to expense ratios rather than full-year sales or earnings guidance.